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Capital Budgeting
**Topics:**
Net present value,
Internal rate of return,
Rate of return /
**Pages:** 5 (1147 words) /
**Published:** Jan 9th, 2013

**Topics:**Net present value, Internal rate of return, Rate of return /

**Pages:**5 (1147 words) /

**Published:**Jan 9th, 2013

Part I

PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time.

1a) If the discount rate is 0%, what is the projects net present value?

Year Cash Flow Discount Rate Discounted Cash Flow

0 -$400,000 0% -$400,000

1 $100,000 0% $100,000

2 $120,000 0% $120,000

3 $850,000 0% $850,000

Answer: The projects net present value is $670,000

If the discount rate is 2%, what is the projects net present value?

Year Cash Flow Discount Rate Discounted Cash Flow

0 -$400,000 2% -$400,000

1 $100,000 2% $98,039

2 $120,000 2% $115,340

3 $850,000 2% $800,974

Answer: The projects net present value is $614,353.45

If the discount rate is 6%, what is the projects net present value?

Year Cash Flow Discount Rate Discounted Cash Flow

0 -$400,000 6% -$400,000

1 $100,000 6% $94,340

2 $120,000 6% $106,800

3 $850,000 6% $713,676

Answer: The projects net present value is $514,815.59

If the discount rate is 11%, what is the projects net present value?

Year Cash Flow Discount Rate Discounted Cash Flow

0 -$400,000 11% -$400,000

1 $100,000 11% $90,090

2 $120,000 11% $97,395

3 $850,000 11% $621,513

Answer: The projects net present value is $408,997.46

With a cost of Capital of 5%, what is this project 's modified internal rate of return (MIRR)?

The formula is: MIRR = (-FV/PV)1/n-1-1

Answer: For this project, the projected MIRR is 42.72%

My next task was to build a graph and explain what is showed.

Answer: The graph showed the net present value decreased as the discount rate increased. The net present value crosses the horizontal line at approximately 42%, just before the Modified internal rate of return of 42.72%.

1b) What is the projects internal rate of return?

Answer: IRR = 4.4184%

If the discount

References: Anthes, G. (2003, February 17). Internal rate of return. Retrieved 29 October 2012, from http://www.computerworld.com/s/article/78524/ROI_Guide_Internal_Rate_of_Return Anthes, G. (2003, February 17). Net present value. Retrieved 29 October 2012, from http://www.computerworld.com/s/article/78530/ROI_Guide_Net_Present_Value